03 September 2010

Remembering Why We Need Health Care Reform

Taxes are lower now than they were a decade ago. Housing prices are about the same, or lower. Food prices have been fairly constant over the last decade. The prices of consumer electronics, like laptop computers, has fallen dramatically. Cars and appliances haven't gone up notably in price, and have improved in quality in various ways over the last decade, although gasoline prices have risen considerably.

A major purchase of most households has gotten dramatically more expensive: health insurance.

Insurance companies have roughly doubled the cost of providing health insurance in the last decade, to about $13,000 per year for family coverage now. Employers have passed some of the cost to employees, who have seen their contribution go up an average of 14% in the last year alone to an average of almost $4,000 per year, and since they pay 70% of the cost (on average) have taken a big hit directly to their profits and have down graded plans to less generous ones. Total premium increases have been more modest, 3% this year, despite warnings from the industry that health care reform legislature would jack up health insurance premiums.

One measure factor that has damped take home pay is rising health insurance costs. Rather than decrease gross pay, employers have cut employee compensation by increasing payroll deductions for health insurance premiums.

A fuller report is available from the Kaiser Family Foundation and the Health Research and Educational Trust.

Health insurance costs in group plans are the same for every family, so an increase in health insurance costs is like a poll tax, the ultimate in regressive taxation. Once upon a time "the cost of living" meant the cost of buying everything that a family buys. Now, rising health insurance costs make "the cost of living" a much more personal thing.

Simply put, nothing costs American families and small businesses more compared to what it cost a decade ago, than health insurance. This is the cost that is crushing the American middle class and the American working class.

Rising health insurance costs have much more of an economic impact on American families than taxes or anything else in their family budget. Also, for those concerned about public spending levels and the deficit, the health care reform that was enacted actually reduces those.

"Obamacare" Explained

Despite all the right wing rhetoric about socialized health care under the health care reform package passed by Congress, called "Obamacare" by its critics, socialized health care is not a meaningful part of "Obamacare." Instead, "Obamacare" is basically a health care privatization bill.

The core provision of the bill address the health insurance cost problem in a way that is real very simple: the government helps pay for it, and reduces the impact of a factor that has been driving up health insurance costs.

First, starting in 2014, the cost of getting health insurance is substantially subsidized for those who have trouble affording it, and small businesses also received subsidies to purchase health insurance (different subsidies for small businesses with low income workers that buy health insurance for employees are in place until 2013). All businesses have major tax incentives to get health insurance for their employees, something that has made it an almost universal benefit in big businesses already.

Second, since the share of people who have health insurance is greatly increased and the ranks of the uninsured will shrink, health insurance premiums aren't driven up by the uninsured passing along costs to the insured, and the cost of government programs that provide health care to the uninsured will fall.

No private sector health care providers will be run by the government.

A larger share of people will have their health care paid for by private health insurance companies, rather than by government programs, after the law takes effect than before the law takes effect. Lots of health care that used to be paid for by Medicaid or by government funding of public hospitals and clinics will now be paid for by private insurance companies.

The "public option," a government owned non-profit health insurance company that was discussed in the health care reform law debate, wasn't part of the final package.

There are no major new government programs to provide health care to people, although some existing programs are tweaked a bit, most notably, by making prescription drug coverage under Medicare a bit more generous, and by expanding the scope of programs like Cover Colorado, which provide health insurance to people that other insurance companies won't agree to cover for an affordable price because those people have health problems.

New spending on government programs that provide health care is offset by limitations on the growth in provider cost payments that will be allowed in government health care programs.

The primary new health care specific tax revenues in the bill are a tax on tanning salons (it took effect in July), an increase in the Medicare payroll and self-employment taxes for those making more than $200,0000 a year that also increases the Medicare tax base (starting in 2013) which puts a burden on those for whom rising health insurance costs haven't has as much of an impact as a percentage of their income, and an excise tax on "gold plated" plan health insurance premiums starting in 2018.

The tax treatment of out of pocket health care costs will be tweaked to favor health care savings accounts over pure out of pocket expenses, and to close a loophole that had allowed a tax deduction for over the counter drugs under one kind of health care benefit for employees.

The most controversial part of the plan is are taxes on individuals and businesses who don't get adequate health coverage by 2014, which actually have penalties for non-payment that are less serious than those for people who don't pay regular taxes.

For people who don't have employer health insurance coverage, "the tax is to be phased in over three years, starting at the greater of $95, or 1% of income, in 2014, and rising to the greater of $695, or 2.5% of gross income, in 2016." The peak penalty is less than 10% the cost of getting health insurance for a single person for a year without tax subsidies. Most of the financial incentives in the individual mandate are in the carrot, which provides a major federal tax credit to partially offset the costs of obtaining health insurance for single taxpayers making less than about $44,000 and families making less than about $88,000 on a sliding scale.

For businesses, "a nondeductible fee [is] charged to businesses with 50 or more employees if the firms fail to offer adequate coverage. The fee will equal $2,000 times the number of employees, though it won’t count the first 30 workers in that calculation." There are tax subsidies for small businesses that buy health insurance as well.

How did health insurance get so expensive?

Figuring out why health insurance premiums have risen so much in a single decade is murkier. One can look to different pieces of the puzzle: Health insurance company profits, administrative costs, provider prices, and health care utilization rates of people with health insurance.

You can look at all four pieces of the puzzle. As I understand the facts, all four have gone up. But, rising provider prices appear to be the main culprit.

Cost Shifting

Some of the increase in provider prices comes from providers shifting costs from uninsured patients who receive charity care or don't pay their bills, and from Medicaid patients whom they receive only 70% of cost reimbursements for, to patients with private health insurance (they can't effectively shift these costs to Medicare patients whose reimbursement rates cover the costs of the services provided, but no more). A little less than 20% of the increase in health insurance costs over the last decade can be attributed to cost shifting, as fewer people have health insurance.

Insurance Company Administrative Cost and Profits

Insurance company level administrative costs and profits are higher in the U.S. than in almost anyplace else in the world, but they account for only about 15% of the total cost of health insurance, and administrative costs for health care systems in other parts of the world, while much lower, are not zero.

About 20% of the gap in the cost of health care between the U.S. and other developed countries can be attributed to administrative costs.

Medical Malpractice

Hype notwithstanding, medical malpractice costs do not account for any meaningful share of the difference in the cost of health care between the U.S. and other countries, and have had an infinitesimal effect on the rising cost of health insurance over the last decade.

Utilization Rates

The U.S. actually has lower utilization rates than many countries for its population as a whole, since a large share of the U.S. population is uninsured and can't afford to pay for health care services out of pocket (typically at higher rates than those that are charged to insured patients).

Provider Prices

The single most important factor driving the high cost of American health care, that accounts for 60% of more of the difference in per capita health case costs between the U.S. and other developed countries is provider prices.

Americans pay higher salaries for medical personnel, like doctors and nurses, higher prices for prescription drugs, and higher prices for medical technology. The prices for all of these things is much higher in the United States than anyplace else in the world by a large margin of about 100% compared to other developed countries.

About 20% of that excess price margin comes from bad debt, charity care and below cost Medicaid reimbursements that have to be passed on to other customers, but the bulk of those higher prices are attributable the fact that people who provide medical industry goods and services, and investors in companies that provide medical industry goods and services get paid bigger profits.

Provider costs have undergone huge increases at far in excess of the rate of inflation over the last decade, and indeed, over the last few decades. Doctors and nurses have seen their compensation increased more than the rate of inflation over the past decade. Drug prices have gone up. Medical equipment prices have gone up.

Higher provider prices are not the only reason that health care in the United States is more expensive than anyplace else in the world, but it accounts for the largest share of the gap, and increasing provider prices are the most important reason that health insurance prices have increased.

Controlling Provider Prices

Identifying provider prices as the crux of the problem helps explain why controlling health insurance costs is so hard politically, and points to what will be necessary to get a grip on the situation.

Public hate for health insurance companies is rivaled only by its distrust of government. And, those twin hates have some basis. But, not the way that most people think that they do.

Most of the ire directed at health insurance companies that is distinguishable from the rising cost of health insurance generally, has been over their excessive profits, over their decisions to deny care to individual beneficiaries, and over the half-assed and incompetent way that our claims are handled due to efforts to limit the money spent to process claims well. But, health insurance companies have failed us mostly for reasons only tangentially to these issues.

Culprit number one in the health insurance cost crisis has been the failure to insurance companies to negotiate lower prices for health care from providers. Instead, they have caved in those negotiations and passed increased provider costs onto the people who buy health insurance. Insurance companies have largely failed to compete by offering lower premiums attributable to lower provider prices.

Most of the ire directed at government has been focused on waste, fraud and abuse. Yet, government processes more claims more efficiently at a lower cost than private health insurance companies do, and have managed to control provider costs better than health insurance companies, although government too has largely failed in the effort to control provider costs, in part, because they lack the monopoly that governments in single payer systems enjoy.

The good news is that microeconomics, which studies questions like how prices for particular goods and services, like doctors visits and nurse's salaries and prescription drugs and hospital stays, is a much better developed and reliable arm of academic economics than macroeconomics, which remains part-voodoo, part-ideology, part-conventional wisdom, and only a smidgen practical social science. We can understand why prices are the way that they are and what will change them.

We can identify both flaws in the way prices are set in the market, that distort prices, and fundamental factors that are driving them.

The bad news is that there are no free lunches when it comes to cutting provider costs. Providers have avoided the wrath that insurance companies and government programs have faced over health care costs, because we like providers.

They make us better and somebody else usually thinks about the bill. It isn't unusual for a doctor to provide care to a patient without either the doctor or the patient knowing the real cost of the service being provided. Regular patients are more likely to know than the doctor.

If we have health insurance, we get medical goods and services at far less of an out of pocket cost attributable to that particular service than the real price, so we are happy when the health benefits we get from them are far greater than the marginal cost of paying for them.

When provider costs are cut, real doctors, nurses, drug researchers, and medical equipment makers see their cost of living decline. The best and brightest of our society may be slightly less tempted to go into medical fields. Health care personnel may decide to cut back their hours. Drug researchers may cut back on R&D. Medical equipment makers may decide not to build new models.

Equally problematic, not all of the increases in provider costs are a product of flawed markets where providers for a complex tangle of reasons, have a better bargaining position than insurance companies and government program administrators.

Provider Supply and Demand Issues

Some of the rising provider costs are simply a function of supply and demand.

Demand is up. The American population is aging and older people need more health care. Improved technology and medical advances mean that health care professionals can provide more value than they used to provide. They have expensive treatments and diagnostic tools that they can make available. Utilization rates may not be high in the U.S. by international standards, but they are probably rising over time, particularly for people who do have health insurance. The people who have been dropping out of the health insurance safety net have often been the young and healthy.

Supply is not up nearly enough.

While we have increased the rate at which our nation produces lawyers, the pipeline of new graduates from medical school has been relatively stagnant. We haven't been opening lots of new medical schools or increasing the size of graduating classes in existing ones. A surge of new doctors from abroad in the 1960s has tapered off. Per capita, we are graduating fewer doctors each year from medical school, although those who do graduate met tougher admissions standards to get into medical school in the first place, and a much larger share of them go on to be exceedingly highly trained specialist physicians. The lure of good research jobs at drug companies and medical equipment firms has kept some would be doctors working there instead of providing medical services directly to patients.

Genuinely job related requirements that nurses have scientific aptitude and high levels of literacy, and a very slowly fading stigma that has slowed the flow of men into the professions, has limited the extent to which nursing programs can expand to produce new graduates to fill high demand for well paying jobs in this field. Older doctors and nurses who have been more well paid in their careers than they expected to be when they started their careers have been retiring early at rates higher than those seen in other professions, since they have the savings to be able to afford it.

Finding solutions to supply and demand imbalances don't require politically explosive pay cuts or freezes for popular, competent professionals, but do require us to take decisive action in the real world to change the situation.

All the price negotiation process reforms in the world can't circumvent the price pressures created by rising demand for health care services in the medium to long term, and a supply of professionals that provide those services that has stagnated.

Supply Side Solutions To Provider Driven High Health Care Costs

The only ways to fix supply are to train more medical professionals at home, discourage older medical professionals from retiring, allow medical professionals abroad to immigrate to the U.S. to provide these services, and lower professional standards involved in providing these services, so that, for example, specialist nurses can do jobs that physicians used to do exclusively.

For example, Colorado is considering allowing certified registered nurse anesthetists to administer anesthesia without a physician's supervision, a type of medical service now restricted to anesthesiologists, who are specialist physicians. But, anesthesiologists are in short supply in rural areas. There are 4 of 42 rural hospitals in Colorado where anesthesia services aren't provided at all, another "24 that do not have anesthesiologists on staff and use only nurse anesthetists under a doctor's direction" despite the fact that the nurse anesthetists may know more about what they are doing than the non-anesthesiologist physician who is supervising the advanced practice nurse, and just 14 rural hospitals in Colorado that have an anesthesiologist on staff.

Similarly, the high cost of obtaining care from an obstetrician has led to a revival of midwifery, a profession itself divided between advanced practice registered nurses with four year nursing degrees and an additional master's degree in their specialty, and midwives with more traditional training outside the world of conventional allopathic medicine.

Physicians assistance and other kinds of specialist nurses and technicians (like phlemobotanists who draw blood) are stepping in to provide more medical care, and pharmacists are increasingly providing more counsel to patients and administering routine preventative medicine shots.

But, paraprofessionals can substitute for doctors only so much. At some point, if demand increases, you just need more doctors.

Demand Side Solutions To Provider Driven High Health Care Costs

The demand problems are also painful to solve. Every economy rations goods and services. Sometimes it is more obvious than others, but it is a necessary reality. Reducing demand requires us to decide what services we are providing now that we won't provide in the future, and reducing demand is particular hard when we are increasing the ranks of people who can afford to obtain care by increasing the ranks of people who have health insurance.

It isn't that we don't have some idea where we could reduce demand. While there are easy "free lunch" solutions, like reducing unnecessary tests administered to cover all bases out of fear of liability, and reducing demand for marginally necessary care that looks cosmetic or insignificant, and doing a better job of managing the small minority of patients who inappropriately ask for medical services they don't need because they seek companionship, want a ride across town in an ambulance or are hypochondriacs, all of these things combined are really just a drop in the bucket. The numbers add up, because it is a very big bucket, but those problems aren't really what is driving the costs of care.

The most painful place to cut, where the risk to reward ratios are badly out of place, is in low benefit end of life care, with care in the last year of life accounting for about half of medical costs. Favoring hospices over expensive hospital care that provides little likelihood of long term success is not an easy choice to make. We are a society allergic to admitting defeat or giving up hope for cures. When you or a love one have a life threatening condition, paying through the nose to extend the ill person's life a few months seems like the only moral solution. And, while the bureaucrats and accountants can easily determine after the fact that funds were spent on care for someone in the last year of their life, it isn't possible to know that with certainty in advance.

All that money and care sometimes does produce results and substantially extends someone's life. New technologies make the line between conditions that can and cannot be treated effectively a moving target. Most people with advanced pancreatic cancers die soon after their cancers are discovered, but sometimes, people like my dad, who seek state of the art care at places like Mayo Clinic and quality follow up care for highly skilled specialists, get lucky and experience long term remissions. His success was a rare one at the time he received treatment and it remains a rare outcome today. But, year by year, as lots of people whose insurance companies provide them with an ability to pay get treatment for end of life conditions that are often fatal and expensive to treat fund a system for providing that care, the success rates rise little by little, until someday, significant success may be routine in a significant share of cases.

The health care reform bill passed by Congress, "Obamacare" refused to make this kind of choice. The fear mongered "death panels" didn't materialize. Congress decided that for now, end of life care was politically sacrosanct. If you hear otherwise, don't believe it.

But, eventually, if this trend continues, we are going to have to come to terms as a society with what modern medicine can do, and what it cannot do. And, we are going to have to decide if slightly extending lives, in a way that affords people a very low quality of life in their final weeks or months, is really worth an immense expense that almost everyone in our society pays either through taxes or through health insurance premiums. We also need to decide (if we do find a way to draw a line in some cases) if that kind of care should be part of a basic core of health care that we feel that everyone should have available to them, or if that kind of health care should be relegated to the gray area of breast implants, unproven experimental drugs, tattoo removals, abortions and private rooms in hospitals that we make available only to people who are willing to pay a full price for them that is often not covered by insurance policies or government programs.

My suspicion is that these decisions will in the end not be made by panels on a case by case basis. Instead, particular situations where we have good evidence will be carved out and identified one by one, and attitudes about that particular situation will change. One of the first recent examples of this attitude change is the individual who has dramatically compromised brain function whose heart and lungs can be kept going with machines. This made the "living will," movement in which people declared their willingness to end expensive life support in this situation widespread.

I hesitate to even speculate about where the next such collective change of attitude will come about, and I won't do so now. But, I don't doubt that at least some of these kinds of decisions will be made by our society and our values regarding what is appropriate to do to treat some of the expensive conditions where medical care produces modest benefits will change, perhaps without any formal legislative decisions at all.

There are also rational reasons to stall. Sometimes new medical advances turn very expensive health care problems into very cheap health care problems.

Tuberculosis used to be a condition so costly to treat (often with little effect) that it spawned its own network of hospitals. Then, one day, a simple antibiotic cure for it dramatically reduced the cost of treating it.

A handful of diseases like cancer and diabetes, drive an immense share of our nation's health care costs. If we discovered a drug that could completely cure some common form of cancer, breast cancer perhaps, if administered for some short period of time (perhaps a month of pills), it could dramatically reduce national health care costs for the nation as a whole, even if the pills were wickedly expensive.

This isn't just a hypothetical possibility. A great reduction in smoking rates has reduced lung cancer rates. The HPV vaccine is almost surely going to greatly reduce cervical cancer rates in a few decades. It happened with polio. It happened with leprosy. Non-invasive surgical methods are dramatically reducing the cost of treating all sorts of surgeries that used to be extremely expensive. Cheap treatments like aspirin regimes, blood thinning drugs, regular moderate alcohol consumption are dramatically reducing heart disease rates.

An even partially effective HIV vaccine, which some progress has been made towards developing, could dramatically reduce the burdens that AIDS places on national health care expenditures.

It wouldn't be at all surprising if a single dose of some new drug could be more effective at ending some kinds of substance abuse problems than years of much more expensive therapies and rehab programs.

Drug therapies, even if they are expensive while they are patented, can be very cheap ways to treat conditions when the patents run out.

A handful of cheap, effective treatments to currently expensive to treat diseases could dramatically reduce the costs of health care.

Also, at some point, the age pyramid is going to stabilize. Until recently, care for the old, which we have funded through the Medicare program, has been a pyramid scheme. When there are many more young people than there are old people, it takes a small share of society's resources to care for the old. As people live longer, that share increases, even if the costs of care are unchanged. But, eventually, life expectancies stop getting longer at rapid rates and we catch up as a society. Demand stops surging, supply catches up, prices fall back to normal rates, and we get used to paying whatever share of our nation's resources it takes to provide this care.

In the United States, we will see a predictable surge in demand as the baby boomers start experiencing late in life health care needs, and will see a drop in demand when the baby boomers have mostly died.

So, technology and demographic change are going to eventually provide our society with some relief from ever rising health care costs. But, in the long term, we're all dead, and until then we need to find solutions that will tide us over.